A nudge for climate capital

Governments could spur green investments by taking risks off the table.

Updated: December 9, 2017 12:00:36 am

0 Shares

In the mid-1600s, Blaise Pascal said it is safer to act as if god exists instead of the other way round — even if god does not exist. (Representational Image: AP)

By Dipak Dasgupta, Jean-Charles Hourcade, and Seyni Nafo

The window is closing fast on a world in which global warming is limited to 2 degrees centigrade. Unless we take decisive actions now, we are headed for disastrous outcomes. December 12 will be the second anniversary of the Paris Climate Agreement. French President Emmanuel Macron has convened a “One Planet Summit in Paris” at which political leaders and experts will gather to take stock and decide what to do next.

Two things are working right now in our favour. First, well-proven technologies to reduce carbon emissions are now widely available at low cost and large scale. This involves not just solar panels, but energy storage, electric buses, large-scale mass transport, climate-friendly railways and safer cities, agriculture and water. But the transition will cost a lot, because we need to build an entirely new network of infrastructure and ecosystems in developing countries.

How much do we need to invest? More than a trillion dollars over a decade in the developing countries which offer the best opportunities. This sounds big, but is a ridiculously small amount: 6 per cent of Europe’s GDP annually. Consider also the speed with which Europe is renewing its internal infrastructure under the Juncker Plan; it has spend 700 billion dollars over five years. A similar plan for climate would yield even better consequences for all.

Advertising

The second thing in our favour is that private savings, held by pension funds, insurance companies, sovereign wealth funds, philanthropists and asset managers are waiting to shift from increasingly risky and troubled fossil fuel assets into sustainable infrastructure. Global bond markets have about 100 trillion dollars in total assets under management, and equity markets, 60 trillion dollars. A rising share is waiting to turn “green”. It wouldn’t take much to shift it, if the risks could be reduced. The global green bond market is showing these effects.

Governments could partially de-risk these investments. They only need to “nudge” the system of finance, by taking some risks off the table intelligently in areas that are best suited for it. The world of finance will then do what it usually does well: Shift capital faster to finance a new engine of growth in the low-carbon economy.

You might like

What would be the instrument and mechanism of such de-risking? Partial state guarantees against large-scale capital flows into new low carbon investments would be the most capital-efficient approach. This could be achieved with a club of climate finance initiative comprising willing governments. The guarantees from such a North-South club would flow from its Northern members to its Southern countries, tapping into global capital bond markets for low-carbon investments. The guarantees would cover the difference in value of carbon saved that resulted from the projects globally. The lowest-cost and greatest opportunities are in the developing world.

The club’s objective would be to unleash a wave of new investments, some 10 times bigger — at much lower cost of capital (200-350 basis points lower), and much longer maturities (from three-five years of money now to 12-18 years of capital) that we need for such low-carbon investments. Developing countries would benefit. The Northern club members would benefit from the carbon savings, and from the spillovers of such investment into growth in their own economies. The club should use some of its finances, with development assistance, to accelerate flows to adaptation finance, and take the risks of foreign exchange off the table for some.

Is this too costly for the fiscally-strained North? Surprisingly, not. In a well-designed guarantee fund, the typical “multiplier” of the paid-in capital needed to start a fund to its impact on investment is 15-20 times. What about the risks of choosing projects that might go wrong? These are very small, actually. The USAID has had a 1.7 per cent default rate after some 20 years on loan guarantees in Sub-Saharan Africa. The World Bank, MIGA, IFC and other MDBs have had virtually no default claims on its guarantees they have operated for years.

Advertising

We expect that the next era of global climate finance will be arriving very soon. We hope to get the first hints of such an ambition from President Macron and other world leaders gathered in Paris. A Club of Climate Initiatives would also advance essential features of the Paris Agreement: Support for the nationally determined contributions of developing countries, consistent with their common but differentiated responsibilities and respective capabilities. With just 50 billion dollars in paid-in capital, such a club could provide tailored support for the parties to the treaty from the smallest to the largest for up to 1 trillion dollars. The International Solar Alliance that India has sponsored with France would gain immediately.

In the mid-1600s, Blaise Pascal said it is safer to act as if god exists instead of the other way round — even if god does not exist. Without becoming religious, decisions in regard to the risks of climate change are similar: Act now, decisively to avoid the possibility of massive costs in the future, even if these are not absolutely certain.